WASHINGTON, July 18, 2013- Futures market experts suggested during a hearing before the Senate Agriculture Committee that certain proposed rules intended to improve oversight of the industry might put customers at greater risk. 

While hosting Wednesday’s Senate Agriculture Committee hearing on the reauthorization of the Commodity Futures Trading Commission (CFTC), Chairwoman Debbie Stabenow, D-Mich., said her goal is to avoid repeating crises like the 2008 “near-collapse of the global markets that left eight million men and women without jobs.”

She also opened the hearing by citing the 2011 collapse of financial firm MF Global, and its loss of $1.2 billion in segregated customer funds.

“As this Committee begins the process of reauthorizing the CFTC, we need to examine lessons from the past and consider ongoing challenges to the system,” Stabenow said. “We want to make sure the agency that is responsible for protecting these markets has the authority, staff, and modern technology it needs to do its job.”

John Heck, chairman of the National Grain and Feed Association’s (NGFA) Finance and Administration Committee, expressed his concerns to the committee about provisions of CFTC’s proposed rule regarding margin funds meant to create more customer confidence in the futures industry. 

The first provision cited by Heck would decrease the time in which customers’ margin calls must arrive to their futures commission merchant (FCM) from the current three days to just one day. 

The NGFA is “urging the CFTC to maintain the current three-day timeline,” Heck said.  “Otherwise, we fear FCMs would require their customers to pre-margin their hedge accounts. That would result in customers being required to send more money to their FCM, potentially putting a greater amount of segregated customer funds at risk in the event of another FCM insolvency.”

The second provision of CFTC’s proposal objectionable to the NGFA would change the timing of FCMs’ calculation of “residual interest,” or the FCM’s own funds used to cover customer margins. CFTC’s proposal would require that every customer be fully margined continually and at all times of day. So, the rule would require that at all times an FCM’s residual interest in segregated accounts to exceed the margin deficiencies of its customers.

“Contrary to the commission’s intent, this proposal actually exposes futures customers to much more risk,” said Heck. 

He said customers would likely exit futures markets in favor of lower-cost risk management alternatives as a result of the rule. “We believe this potential exodus from futures markets would be most clearly seen among agricultural producers who utilize futures for risk management purposes and among smaller grain-hedging firms,” he said.

Terrence Duffy, CEO of CME Group Inc., also questioned the proposed residual interest rule. 

“It does not appear that any system currently exists or could be constructed in the near future that will permit FCMs to accurately calculate customer margin deficiencies, continuously in real-time,” he said. “We believe this rule and others could have a very significant impact on certain sectors in the marketplace, particularly smaller FCMs that serve the agricultural community.”

He did add that several new requirements for futures self-regulatory organizations (SRO) in the wake of FCM failures have “buttressed” the SRO model. 

Some of the requirements implemented over the last 18 months include daily segregation reporting by all FCMs and CEO/CFO signoffs of customer segregated fund distributions, also known as the “Corzine rule” after former MF Global CEO Jon Corzine,

“These new rules, which, as noted above, have also been proposed by the CFTC in regulations to enhance protections afforded customers and customer funds, have strengthened SRO regulatory protection for all participants in the derivatives markets,” Duffy said.

When asked by Senator Amy Klobuchar, D-Minn., about the progress being made in the industry, National Futures Association CEO Daniel Roth noted improvements regarding FCM transparency and a daily confirmation process with the CME. 

“We’re never done with this until I figure out how to change human nature and eliminate fraud,” he said. “We just have to constantly strive to eliminate any possibility that anyone can get away with doing this again.”


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